Changes in Dividends from April 2016

As of April 2016 the current dividend tax system is going to be completely overhauled, the consequences of this will mean a substantial tax increase for most limited company directors. In this blog, we will try to explain how this will affect you and the relevant costs.

How are dividends currently taxed?

Currently basic-rate taxpayers don’t pay tax on any of their dividend income. Meanwhile higher-rate taxpayers pay a blanket rate 25% and additional-rate taxpayers pay 30.56%. There is also a 10% tax credit on dividends that will be abolished come 2016. 

The gross dividend amount is taxed at the current tax rates (as shown below):

  • 10% (basic rate)
  • 5% (higher rate)
  • 5% (additional rate)

After the tax credit is taken into account, you pay no further tax at all on dividends falling into the basic tax band, 25% on dividends falling into the higher rate band, and 30.56% for the additional tax band.








What is due to change?

As the current system of tax credits are due to be abolished and will be replaced by a simpler system. Once the personal allowance has been accounted for (£11,000 from April 2016) all individuals will be able to receive £5,000 of dividend income with no tax liability at all.  For example, if your entire income is £16,000 or less, you will pay no dividend tax at all.  The new tax rates will be as follows:

  • 5% (basic rate)
  • 5% (higher rate)
  • 1% (additional rate)

However, for those who receive more than £5,000 per annum through dividends, which will be most Limited Company Directors, it seems that the changes to dividend taxation will result in a significant tax hike and a reduction in the tax benefits for the majority of contractors. However, worth noting that dividends received by pensions and ISAs will be unaffected by the new ruling.

Comparative Dividend Tax Table

The below table shows how much more dividend tax you will pay in 2016/17 compared to the current year, assuming that you take the personal allowance as salary in each tax year (£10,600 and £11,000 respectively).



2015/16 TAX  

2016/17 TAX  


























This table has been provided for illustrative purposes only. Your salary will be subject to National Insurance Contributions (NICs) if it is above £8,060 (2015/16 tax year).
Your personal allowance is also being reduced by £2 for every £1 you earn over the £100,000 limit.